Microsoft, in Middle Age, Hurries to Go Beyond the PC

When Bill Gates, the chairman of Microsoft, gives his keynote address on Monday at the international exhibition here he plans to show off some of the company's latest technology -- software that powers mobile phones, online game machines and television services.

Those areas are crucial to the company's long-term strategy, but the initiatives are all bleeding money. And so the industry is watching to see whether Microsoft, as it enters middle age, can be innovative enough to compete effectively in software platforms beyond the personal computer. The goal is to provide software giving consumers access to content from a variety of gadgets: showing family slides on a personal computer, television or game console, for example, or tapping into a personal music library from a mobile phone, TV, laptop or stereo.

Already, consumers use many of Microsoft's Xbox game consoles to watch DVD's. And it is possible to listen to music and watch the accompanying video on a Microsoft-software-powered personal computer, mobile telephone and television.

''It is not to say that Microsoft won't invent the platforms,'' said Joe Schoendorf, a partner at the Silicon Valley venture capital firm Accel Partners. ''But there is a better-than- even chance that a small, as yet unnamed or maybe unstarted start-up somewhere in the world will do it. The idea that a platform that was invented in the last century could carry us through to the next century doesn't compute.''

Microsoft has been trying to create business from the convergence of computing communications and entertainment technologies since at least 1995, with mixed success. All of its $13.2 billion operating profit for the financial year that ended in June came from the three divisions that focus on its traditional strengths: PC operating systems, PC applications, and server operating systems and programming tools.

The home entertainment division, which includes the Xbox console, video games, PC games, consumer hardware and software and the television platform, generated a loss of $940 million on sales of $2.78 billion for the year. The company's mobile and embedded device division had a loss of $175 million on sales of $153 million.

The company says that its investments in the new areas are a long-term play. Microsoft, which is pouring more than $6 billion annually into research and development, ''has the financial flexibility to stay the course for a lengthy period of time,'' said John G. Connors, the chief financial officer.

Some of the investments are beginning to bear fruit, he said. ''We are just now beginning to see the smart-phone category take off,'' Mr. Connors, said, referring to mobile devices capable of transmitting voice, image and data. ''I wouldn't anticipate to have the same market share on the phone side as we do with Word and Excel, but we can get to good market share and build a big business.''

Mr. Gates, during his keynote speech on Monday at Telecom World, a gathering of sponsored by the International Telecommunication Union, is expected to hold up one of two new smart phones based on the Windows Mobile software platform: the SPA E200, a silver-and-black phone with an integrated camera that is made by the Taiwan company THC and will go on sale in Europe in November via the mobile phone operator Orange; or the glossy clamshell-shaped MPx200, which Motorola will introduce in Europe this month.

Both phones represent important milestones for Microsoft in Europe, which has been a crucial testing ground for the company's mobile ambitions. It biggest carrier deal to date has been with Orange, a pan-European mobile operator based in Britain and owned by France Télécom, which is already selling three other phones based on the Windows mobile software platform. The MPx200 is the handset based on Microsoft's mobile software produced by a major cellphone maker. Still, it has been four years since Mr. Gates showed off a prototype of a Microsoft phone at the same World Telecom event in Geneva, and analysts say Microsoft is still at the starting line.

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An estimated 11.3 million smartphones will be sold worldwide in 2004, and only 2 percent are expected to use Microsoft's Mobile software platform, said Richard Windsor, an analyst at Nomura International in London. Microsoft is making a big push to sell a mobile networking technology to phone and cable operators, arguing that its technology is the way for the operators to provide new mobile data applications.

Microsoft is also marketing its TV technology to phone and cable operators. Interactive TV is an area that many companies have been aiming at for a dozen years. Microsoft has come up with a variety of new technology solutions in the last 18 months that do a better job of meeting customer demands, analysts say.

One example is a TV delivery service based on Internet standards that allows carriers to deliver new pay TV services over existing high-speed Internet connections. An experimental model of the system will be on display for the first time at the show here. The technology will be tested by phone companies in Canada and India, said Ed Graczyk, director of marketing for Microsoft TV.

Phone companies need to compete with cable and satellite operators, which are able to deliver voice, data and video services. Microsoft's pitch is that the Windows Media 9 version of its Media Player is a cost-efficient and technologically superior way of compressing video over a limited amount of bandwidth, allowing phone companies to deliver pay-TV services to set-top boxes.

In game consoles, Microsoft went from nowhere to become No.2 worldwide, but it is still way behind Sony. The research and consulting firm International Data Corporation forecasts that Sony will control 61.1 percent of the game console market at the end of this year, compared with 22.9 percent for Microsoft and 13.5 percent for Nintendo.

But Microsoft is interested in selling more than boxes. It is putting a lot of emphasis on Xbox Live, an online game service that it says is driving broadband traffic for phone companies.

Microsoft's cash hoard gives it a huge war chest, and it is looking to gain dominance 10 to 15 years from now, after two or three more generations of consoles have been released, according to Michael Goodman, a Yankee Group analyst.

A Microsoft executive seemed to support that view. ''It is a marathon, not a sprint, and we are pretty good at marathons,'' said Peter Moore, vice president for worldwide retail sales and marketing at Microsoft's home and entertainment division.